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Risks of ongoing operations

We continually identify and monitor risks that may affect our business. We also take actions to mitigate them and limit their impact.

The main risks and threats of PGE S.A. and the PGE Group are presented below along with their assessment and outlook in the horizon of the next year.

Risk

level

Risk

outlook

low

medium

high

decrease

growth

stable

low level

Risk does not pose a threat and may be tolerated,

medium level

Risk which needs preparation of the proper reaction based on analysis of costs and benefits,

high level

Intolerable risk, which needs immediate and active reaction, leading simultaneously to limitation of possible consequences and of probability of occurrence thereof

Market

(product) risks

Related to prices and volumes of offered products and services

Prices of electricity and related products – resulting from a lack of certainty with regard to the future levels and volatility of commodity prices relative to open contract positions - this particularly concerns electricity and associated products (property rights, CO2 emission allowances).

Electricity sales volumes– this risk derives from a lack of certainty with regard to the conditions determining the demand and supply of electricity, directly affecting the volume of market sales by PGE Group.

Tariffs (regulated prices) – resulting from the requirement to approve rates for distribution services and electricity and heat prices for particular groups of entities.

Property risks

Related to development and maintenance of the assets

Failures– connected with the operation and degradation over time of energy equipment and facilities (maintenance and repair work, diagnostics)

Human Resources – pertaining to provision of employees with the relevant experience and competences, who are capable of performing specific tasks.

Social dialogue – connected with a failure in achieving agreement between the Group’s management and employees, what could lead to strikes/collective labour disputes.

Regulatory and legal risks

Related to compliance with external and internal legal provisions

Legal changes in support systems – connected with uncertainty as to the future shape of the support system for production of certified energy.

Costs of purchase of certificates and CO2 allowances - resulting from the possible changes to the statutory requirement for electricity sellers to purchase a specified quantity of property rights and to uncertainty with regard to volume of CO2 emission rights granted free of charge in future.

Compensation for the termination of long-term contracts (LTCs) – there is a possibility that the level of adjustments to advances collected for stranded costs, as calculated by the Group, will be questioned by the President of the Energy Regulatory Office (URE), as a result of which the Group will be obligated to return advances received for terminating the LTCs.

Environmental protection – resulting from industry regulations specifying which "environmental" requirements energy installations should meet and what the principles for using the natural environment are. The future environmental regulations and uncertainty concerning their final shape (in particular with regard to the revision of BAT / BREF) may translate into a change in the level of capital expenditures of the PGE Group.

Unresolved legal status – connected with difficulties in respect of land acquisition or access to land in the course of new investments (particularly in the Distribution segment).

Concessions – resulting from the statutory requirement to hold concessions with regard to conducted operations.

Financial risks

Related to finance management

Credit risk – connected with the counterparty default, partial and/or late payment of receivables or a different type of breach of contractual conditions (for example failure to deliver/collect goods or failure to pay for any associated damages or contractual penalties).

Liquidity risk – connected with the possibility of losing the ability to meet current liabilities and obtaining financing sources for business operations.

Foreign exchange risk – understood in particular as risk that PGE Group's cash flows denominated in currencies other than the functional currency are exposed to due to negative exchange rate movements.

The main risk mitigation actions for the PGE Group are presented below along with the description of the main tools used for the management of the given risk.

Market (product) risks

Market (product) risks revenues and product and service offerings

Measures: PGE Group has rules for managing market risk (price- and volume-related), which include a global risk appetite measure, VaR-based position limits and management of consolidated exposure to commodity pricing risk through mechanisms for protection against risk exceeding acceptable levels. Those rules provide consistent guidance in respect of process organisation in the context of commercial strategy and mid-term planning. PGE Group follows rules pertaining to a strategy for hedging key exposures in the area of electricity and related product trading that correspond to the adopted risk appetite in the mid-term. Position hedging levels are established with consideration given to the results of analysing pricing risk in respect of electricity and related products. Target hedging levels are specified taking into consideration the Group’s financial standing, including in particular its strategic objectives.

PGE Group researches, monitors and analyses the electricity and related products markets in order to optimally use its generation and selling capacities.

New products are introduced on the retail market and actively promoted through nationwide marketing campaigns. Maintaining a diverse product portfolio and focusing efforts on tailoring its offering to the market, the Group diversifies channels used to reach the end-customers and diversifies target groups with account take to client’s volume potential. Efforts aimed at current clients retention are based on a model consisting of a diversified portfolio of customer loyalty schemes and client-acquisition activities. Portfolio includes also special offers dedicated to former clients who moved over to the competitors, as well as industry offerings dedicated to specific types of economic activity. PGE Group also introduces bundled offers. Particular attention is paid to ensuring a high level of customer service by developing employees’ competences and building relations with business and retail clients. Having implemented tools to support these processes, the Group effectively manages information flows, which directly translates into comfortable client relations as well as better sales planning and organisation.

Operational risks

Impact: costs

Measures: PGE Group's results are to a large extent dependent on the costs incurred in the course of operations. The Group optimises costs inter alia through monitoring of fuel prices and reserves and securing supply through long-term contracts with suppliers and through price fixing formulas. Inspections, repairs and modernisation of the existing assets optimise equipment lifecycles and required availability of key components of those assets. Level of costs is affected by securing CO2 emission allowances partly free of charge and purchase of lacking allowance with the assumption of securing the margin on sales.

An intensive and effective dialogue is also carried out in order to avoid escalation of potential disputes with the social partners and to work out the most favourable solutions with regard to employment and employment costs within PGE Capital Group connected therewith.

Property risks

Impact: assets

Measures: PGE Group effectively pursues a strategy for building up and modernization of its production capacities. The Group diversifies current structure of the production sources due to energy generation technology. Currently PGE Group is running two key investments (Opole, Turów) alongside a number of grid investments, RES investments as well as modernisation and development projects. We are continuously carrying out maintenance and repair work. Our main generation assets were insured against failure and damage to property. The reliability of the power supply to the end users has been systematically improved.

Regulatory and legal risks

Impact: compliance area

Measures: PGE Group's operations are subject to a host of national and international laws and regulations. Monitoring of the changes being introduced or proposed allows for minimization of their negative impact on our operations in key business segments. PGE S.A. is one of the members of the Polish Electricity Committee that opened its office in Brussels. Through the Committee’s operations, PGE S.A. actively influences proceeding and shaping of EU law and engages a dialogue with the EU institutions.

The Group adapts its internal regulations and practices to make sure that the activities are in compliance with the power sector regulations and binding law.

The extraction of fossil fuels as well as the production and distribution of electricity and heat have impact on the environment therefore the Group continuously improves its activities aimed at protecting and improving the state of the environment by implementing technological and organisational solutions ensuring efficient and effective management in this area.

Financial risks

Impact: Finance management

Measures: PGE Group manages credit risk stemming from commercial transactions. Prior to executing a transaction, a counterparty assessment is carried out and forms a base for applying credit limits, that are regularly updated and monitored. Exposures that exceed established limits are hedged in accordance with the Group’s credit risk management policy.